In this article 6 sections
The sale you only make once
Darren Strong, founder of Scalable, and Mit Patel, founder and former owner of London MSP Netstar, co-host this scaleUP episode. Their guest is Daniel Welling of MSP Finance Team. Daniel, a salesperson by trade, ran an IT services business until 2014. The episode covers M&A, valuations and exits.
Daniel says selling is almost a taboo topic, yet “probably the most important sale you’re going to make of your life”. Owners worry about customers, staff and family, and most only do it once. Asked whether a business must choose between M&A and organic growth, he says the limit is resources and focus. Do them in series rather than in parallel.
Why Daniel values organic growth higher
Mit sets up two £3M businesses, both growing 30% a year, one by acquisition and one organically. Daniel would value the organic one higher. In his analysis, the cost of acquiring a customer through M&A is higher than through an efficient sales process, and acquired growth stalls without more investment. Darren adds the cost of integration.
Daniel contrasts traditional private equity, which buys, combines and sells on, with Evergreen, which buys and holds, keeping brands and leadership intact. Mit’s view is that leaving leadership and ways of working in place should mean less churn of people and clients, and he thinks the model makes sense for longevity.
Getting to a realistic number
The first mistake of an inexperienced seller, Daniel says, is going to market with the number they need. His line: “it’s only worth what someone’s prepared to pay for it”. Ask what you would pay, and how long it would take to get your money back. Brokers can carry a bias, like the estate agent who wins the listing with the highest valuation. Mit adds a check: how many houses has that agent sold in the last 30 days? Daniel’s advice is to seek independent valuations, cultivate several potential acquirers and track value continually.
Normalised EBITDA and the multiple
For an established MSP, Daniel uses normalised EBITDA. Adjusted EBITDA removes the shareholders’ costs. Normalising then charges a market rate for the roles the owners actually do. Many owners pay themselves less than a job would pay, so normalised profit comes out lower than they expect. The multiple applies to that number, before anyone gets to the “guy at the pub” who claims 20 times.
For smaller businesses he values core managed services at 1 times annual value. Core means services at a solid 50% or more gross margin, which usually excludes Microsoft 365 licences. In his example, a £1M revenue business with £400,000 of core service is worth £400,000. If it makes 10% normalised EBITDA, 4 times £100,000 gives the same answer, so the two methods triangulate. Multiples rise with scale because acquirers would rather do one large deal than 10 small ones. He puts the mid-market around 5 times EBITDA.
Trust, terms and the data room
Deals that fail late often turn on a detail that surfaces a trust issue. Daniel’s advice is for the acquirer and the seller to keep talking directly rather than through advisers. Mit once advised a friend selling to private equity to get the acquirer into his office and instruct both sets of solicitors together.
Heads of terms are a non-legally binding summary that briefs the lawyers, and should not be rushed. Share as much as possible early, because problems come out eventually. An acquirer will expect client, staff and supplier contracts, an anonymised client list, at least 3 years of monthly management accounts and monthly board minutes. Mit describes taking an idea from private equity due diligence into property deals: an NPS survey of tenants. Daniel flags client concentration above even 5%, and says risk shifts payment into deferred, performance-based consideration.
Daniel’s closing advice is education and good advisers. Mit’s is to learn what normal looks like in documents such as shareholder agreements before any sale. Darren’s is to run the business with the data room in mind.
Common questions
How does Daniel Welling value an MSP?
Normalised EBITDA times a multiple for established businesses. For smaller ones, 1 times annual core managed services income.
Why is normalised EBITDA often lower than owners expect?
It charges a market rate for the owners’ roles, and many owners pay themselves less.
Is organic growth worth more than growth by acquisition?
In Daniel’s view, yes, all else being equal. Customers cost more to acquire through M&A, and acquired growth stalls without further investment.
What should be ready for due diligence?
Contracts, an anonymised client list, at least 3 years of monthly management accounts and board minutes, kept in a data room.
What is the Assurix Trustmark?
The live trustmark for MSPs. Assurix independently assesses 59 controls: 40 security controls aligned to NCSC CAF 4.0 and 19 operational controls built for MSPs. Live-measured controls are checked every six hours and the rest on a set cycle. An Assurix assessor signs off. A failure left unfixed for 30 days suspends the Trustmark publicly.
